The debates are over, but let's not pick on the candidates. Let's take a closer look at the nonsense spouted by Fox News moderator Chris Wallace on the state of our “entitlements,” which I prefer to call retirement benefits after a lifetime of hard work and paying taxes.
Medicare, Wallace said, “is going to run out of money in the 2020s … and at that time, recipients are going to take huge cuts in their benefits.” That's not true.
Medicare financing, like Julius Caesar's Gaul, is divided into three parts: hospital payments, physician payments and drug payments. The money for doctors and drug companies comes from the government's general fund.
Whether we want to continue funding those programs or the Defense Department or Head Start or anything that depends on general tax revenue is a political choice—not one driven by financing mechanisms.
The claim that Medicare is “going to run out of money” rests solely on the status of the Medicare trust fund, which pays for hospital care and is financed by the 1.45% payroll tax. The latest Medicare trustees report projects the Hospital Insurance Trust Fund, built up by surpluses generated by this tax over the years, will be exhausted in 2028.
Assuming nothing changes between now and then and their projections are accurate—a questionable assumption I will get to below—the tax will generate enough revenue in 2028 to pay fully 87% of Medicare's hospital bills.
Congress at that point will have three choices. It could use income taxes to support hospitals like it does the rest of the program; it could raise the payroll tax to about 2.2% to cover the shortfall; or it could means-test the program, cut benefits or use a combination of the two to close the gap. That's hardly a “huge cut” in benefits.
But there's good reason to question the validity of the actuaries' estimates. After watching video replays reverse umpire decisions during the baseball playoffs, I was inspired to review old trustees' reports to see how well their projections held up.
To borrow a phrase from one of our presidential candidates: not good.
Let's pick just two points in time: the 2007 report, which came out just before the Great Recession, and the 2012 report, which came two years after passage of Obamacare. Both reports are similar in one regard: they knew with some demographic certainty roughly how many seniors would be eligible for Medicare in 2015, the last year for which accurate spending data are available.
In 2007, they projected 53.9 million people. It turned out to be slightly higher—55.3 million people, a fairly small difference probably driven by the fact people are living slightly longer than expected.
That's about the only thing they got right.
In 2007, the trustees predicted hospital spending would total $360 billion in 2015. By 2012, they lowered their projection to $301 billion. Total spending on hospitals last year turned out to be $279 billion.
Projections for overall spending on Medicare followed the same trajectory. Back in 2007, the trustees expected average spending on hospitals, doctors and drugs per beneficiary in 2015 would total $15,983. By 2012, they'd lowered that estimate to $12,803. Last year, average spending came in at $12,744 per beneficiary.
And if we look only at payments to hospitals, 2007 projections for 2015 of $6,644 per beneficiary was adjusted down to $5,350 in 2012. Actual expenditures for hospital care in 2015 turned out to be $5,019 per beneficiary.
The experts have consistently missed the slowdown in healthcare spending. They also missed the effect of the Great Recession and slow recovery on payroll tax collections, which are running 16% below projections.
So is a “grand bargain” that cuts benefits and raises taxes really necessary, as Wallace asked? The track record of recent Medicare trustees' reports would argue against hasty action, especially with the projected date for trust fund exhaustion still more than a decade away.